I haven’t written much this week because I haven’t seen much to write about.

Still looks like both the economy and the markets are discounting the cliff. And still looks to me like ex cliff GDP would be growing at about 4% this quarter, with the Sandy-cliff related cutbacks keeping that down to maybe 2.5%. And going over the full cliff is taking off maybe 2% more, leaving GDP modestly positive.

Which is what stocks and bonds seem to be fully discounting.

As previously discussed, the housing cycle seems to have turned up, which looks to be an extended, multi year upturn with a massive ‘housing output gap’ to be filled. And employment is modestly improving as well, also with a large output gap to fill. Car sales are back over 15 million, and also with a large output gap to fill.

The way I see the politics unfolding, the full cliff will be avoided, if not in advance shortly afterwards, as fully discussed to a fault by the media. That means GDP growth head back towards 4% (and maybe more)

Nor do I see anything catastrophic happening in the euro zone. They continue to ‘do what it takes’ to keep everyone funded and away from default. And conditionality means continued weakness. Q3 GDP was down .1%, a modest improvement from down .2% in Q2, and a flat Q4 wouldn’t surprise me. The rising deficits from ‘automatic fiscal stabilizers’ (rising transfer payments and falling revenues) have increased deficits to the point where they can sustain what’s left of demand. And the recent report of German exports to the euro zone rising at 3.5% maybe indicating that the overall support for GDP will continue to come disproportionately from Germany. And rising net exports from the euro zone will continue to cause the euro to firm to the point of ‘rebalance’ which should mean a much firmer euro. And as part of that story, Japan may be buying euro to support it’s exports to the euro zone, as per the prior ‘Trojan Horse’ discussions, and as evidenced by the yen weakening vs the euro, also as previously discussed.

And you’d think with every forecaster telling the politicians that tax hikes and spending cuts- deficit reduction- causing GDP to be revised down and unemployment up, and the reverse- tax cuts and spending hikes causing upward GDP revisions and lower unemployment- they’d finally figure this thing out and act accordingly?

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Currently I’m refinancing, finding it taking near 3 months and the conditions are ridiculous. Dudley’s speech made me realize Fannie and Freddie don’t want to refinance your loan. They don’t want to pass on the effects of lower interest rates to borrowers. They are skimming the spread between MBS investors and homeowners. GSE’s, rather than taking a bailout from congress (more deficit spending) are taking their ‘bailout’ from borrowers who are current on their loans.

“The difference between yields on Fannie Mae mortgage bonds lenders typically use to package new loans for sale and 30-year new-loan rates is more than 1.2 percentage point, about the same as when the Fed announced additional buying in September, according to data compiled by Bloomberg and Bankrate.com. That’s up from about 0.8 percentage point in March and compares with a median of about 0.4 percentage point during the last decade.”

Personally, I still see the stock market increasing, not so sure about the real economy.

“Multifamily construction nationwide is two-thirds of the way back to its prerecession peak, while single-family home construction is still only about a third of the way back to its peak, said David Crowe, the chief economist of the National Association of Home Builders.”

“Large budget deficits would reduce national saving, thereby curtailing investment in productive capital and diminishing future output and income. Interest payments on the debt would consume a growing share of the federal budget, eventually requiring either higher taxes or a reduction in government benefits and services.”

It’s how the define ‘national savings’
It’s an old gold standard term which was equal to the trade gap.
it goes like this:
The govt. balance plus the domestic balance= foreign balance = ‘national savings’

Warren, sorry if this is too lazy of a question, but does that old equation in essence mean that you as a nation have to net export to build gold=currency reserves, which is called ‘national savings’? (That is assuming you can’t mine gold, I suppose…)

@jcmccutcheon, I’m more pessimistic about future performance. While employment has recovered somewhat, enormous numbers of the newly re-employed are making due with lower wages and part-time work. Student loan delinquencies are rising, and it’s only a matter of time until gas prices surge again. I’m thunking Q4 will come in under 2% growth.